The Middleby Corporation

Good day, everyone, and welcome to today's third quarter 2025 Middleby Corp earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask your questions during the question and answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to CEO Tim Fitzgerald. Please go ahead.

Good morning, and thank you for joining today's call. I'll begin this morning with an overview of the announced strategic review of our residential kitchen business before discussing highlights of the third quarter and for each of our business segments. As part of our efforts to drive long-term shareholder value, we've been undertaking a strategic review of our overall business portfolio. We continue to believe that our shares are significantly undervalued, and we're taking deliberate steps to close that gap, including with a planned spinoff of our food processing business, targeted for the completion in the second quarter of 2026, and also through our significant share repurchasing activities. As we further continue to evaluate opportunities to unlock the value at each of our three industry-leading segments, we have embarked on a review of options to maximize the value of our residential kitchen business. This includes an evaluation of a range of options, one of which is a potential separation of our residential kitchen business. During the quarter, in connection with that review, we recorded a non-cash impairment charge of $709 million. This is an accounting-driven valuation adjustment and does not reflect any change in our confidence in the segment's underlying strength. In fact, we believe our residential business is positioned better than ever. With a portfolio of iconic brands, we have invested in new state-of-the-art manufacturing centers of excellence. We are introducing new products with exciting features, and we have strengthened our team across the platform. While the residential market remains challenging, our business is positioned to benefit from a recovery. We intend to pursue options that will maximize shareholder value while benefiting our customers and employees. But please note we will not be making any further comments on the status of this strategic review on the call. As for the third quarter, we are pleased with our results, which once again demonstrate the strength of our business and our team's disciplined execution. Total revenue of $980 million exceeded the top end of our guidance range. Each of our three segments better surpassed expectations. This top line performance drove adjusted EBITDA of $196 million and adjusted EPS of $237, both exceeding the upper end of our guidance. These results reflect the benefits of our strategic investments over the past several years. expanding our go-to-market strategy, strengthening local sales support, advancing digital marketing, and enhancing after sales service capabilities. We continue to invest in innovative technologies that help customers address labor and training challenges and operate more efficiently. Our ice and beverage platform remains a core area of opportunity and is expected to be a meaningful growth driver in the years ahead. While broader market conditions remain mixed, our long-term strategic focus has positioned Middleby to capture outsized growth when markets normalized. At our commercial food service segment, we returned to positive organic growth in sales for the first time since the third quarter of 2023. Growth was driven by the general market, institutional customers, and with emerging restaurant chains. offset in part by ongoing softness among large QSR customers facing lower traffic and cost pressures. We are encouraged by the traction we're seeing from investments made with key US channel partners. By partnering and educating our dealer base on the performance advantages of our technologies, we are capturing market share and outpacing overall industry growth in this area. And we're particularly excited about the growing pipeline of opportunities of our ice and beverage solutions. At the residential segment, we've continued to make significant progress both strategically and operationally. During the quarter, we saw healthy growth with our premium indoor brands. This growth was offset by tariff-related headwinds impacting our outdoor product sales. Additionally, we experienced temporary shipment delays tied to the consolidation of operations. actions that will ultimately drive greater efficiency and profitability across the portfolio. A major milestone was the opening of our new state-of-the-art facility in Greenville, Michigan, which serves as a center of excellence for all our residential refrigeration brands. This facility will enable scaling of manufacturing, engineering, and logistics, resulting in enhanced customer service and long-term margin benefits. In food processing, improving international markets offset continued softness in the U.S. During the quarter, we realized a strong order rate, which inflected positive after a soft start to the year as customers resumed deferred capital projects. Our ability to deliver comprehensive, full-line solutions positions us to capture these opportunities. We also expanded our global network of innovation centers with the opening of the Middleby Innovation Center in Venice, Italy. A flagship hub for the food processing group focused on accelerating customer collaboration and technology development. This new innovation center is unique for the industry and it will transform how we engage with our customers for years to come. Our strong financial results and conviction in Middleby's future underpin our capital allocation priorities. We expect to continue repurchasing shares using substantial cash flow we generate. This reflects our belief that Middleby's current share price undervalues the long-term earnings potential of our company. By investing in share repurchases today, we are positioned to drive sustained shareholder value as our end markets recover. In parallel, we will continue to evaluate strategic alternatives across our portfolio to ensure we are optimizing Middleby's overall value creation potential. Now looking beyond the near-term conditions, our competitive advantages are compounding. We have an unmatched portfolio of brands. We have the industry's strongest innovation pipeline. We're making targeted strategic investments in new and growing addressable markets, such as ice and beverage. And we're leading in next generation automation and IoT capabilities that position us ahead of competitors for the years ahead. And most importantly, we have a world-class team around the globe whose commitment and execution continue to drive our success. While we're navigating some market volatility, Middleby is stronger, today than any point in our history. The foundation we've built positions us exceptionally well to capitalize when markets fully normalize. With that, now I'll turn it over to Brian to discuss our financial performance in greater detail and guidance for the fourth quarter. Thanks, Tim.

Looking back at the third quarter, We were pleased to see revenue, adjusted EBITDA, and adjusted EPS performance all exceeding the guidance we initiated last quarter. I note that adjusted EPS was positively impacted by $0.15 related to stock count. For commercial food service, despite market conditions that continue to be challenging, we delivered 1.6% organic revenue growth. Positive impacts were seen from general market, institutional, and fast casual customer segments. We delivered $606 million of revenue and a solid EBITDA margin of nearly 27%. This would have exceeded 28% if not for tariff impacts. Customer engagement and interest in our leading technologies remain strong, especially in beverage dispense and ice products. At Residential, on a year-over-year basis, we saw growth across our premium indoor businesses. Tariff impacts had a rather detrimental impact on outdoor products revenues and also pressured margins. Revenues were nearly $175 million and our EBITDA margin was slightly below 10%. The cost impact of tariffs was a drag of more than 150 basis points on margins. At food processing, Q3 revenues exceeded $201 million and our organic EBITDA margin was 21%. This would have been nearly 22% if not for tariff impacts. Margins were further impacted by geographic mix. The Q3 performance exhibited some of the short-term lumpiness that can sometimes be seen in this business, ahead of what will be a rather strong Q4, especially across our brands serving the protein space and in automation solutions. We are experiencing a strengthening order rate and growing backlog. On a consolidated basis, total company adjusted EBITDA for Q3 was over $196 million, and adjusted EPS was $2.37. As noted in our earnings release today, we recorded impairment charges of $709 million during the quarter to write down the book value of the residential segment to its estimated fair market value. Regarding tariffs, the adverse net impact to EBITDA in Q3 was approximately $12 million, and we estimate that the Q4 impact will be $5 to $10 million. This continues to be subject to where tariffs finally land and is also subject to risks, particularly in key supply chain markets of China and India, which continue to be especially volatile. The benefits of pricing and operational actions we have taken are expected to fully offset tariff impacts as we begin 2026. Q3 operating cash flow exceeded $176 million, up 12.5% year over year, and free cash flow was over $156 million. Our leverage ratio per our credit agreement at quarter's end was 2.3 times. Please recall that on September 1st, our convertible notes matured. Accordingly, borrowings on our revolving credit facility have increased, and our interest expense will be higher in Q4, estimated at $28 to $30 million. Regarding capital allocation, earlier this year we communicated the decision to deploy the vast majority of our free cash flow to share repurchases. Year-to-date, our free cash flow is $365 million, yet we have used $500 million to repurchase over 3.5 million shares at an average price of $144.55 per share. We've reduced our share count by 6.4% during 2025. Looking ahead to the coming quarters, we will continue to be opportunistic as we have excess capital to deploy. We will do so while maintaining the financial flexibility needed for strategic growth investments. Regarding today's updated outlook for the remainder of the year, I offer the following perspectives. At Commercial Food Service, we are seeing pressure to few of our largest QSR customers, which is constraining delivering sequential revenue growth. For food processing, with improving order activity, the fourth quarter will be the strongest of the year, as is the normal pattern for this unit. Lastly, in the residential segment, I characterize market conditions as fairly stable, And for Q4, which will also be our strongest revenue quarter of the year, we are forecasting a typical yet modest seasonal step-up in revenues. So, for Q4, we expect to achieve the following. Total company revenue of $990 million to $1,020 million. And by segment, this is comprised of commercial food service at $570 to $580 million. residential kitchen at 180 to 190 million, and food processing at 240 to 250 million. Adjusted EBITDA is forecasted to be between 200 million and 210 million, and adjusted EPS is projected to be in the range of $2.19 to $2.34, assuming approximately 50.4 million weighted average shares outstanding. Then for the full year, we expect to achieve the following, total revenues of 3.85 to 3.89 billion, adjusted EBITDA of 779 to 789 million, and adjusted EPS of $8.99 to $9.14, based on the sum of four individual quarters. Please refer to slide seven of the presentation we have posted online at our website for all those details. We will provide guidance for 2026 in conjunction with our release of fourth quarter results. I will conclude my comments with a quick update on the food processing spinoff. We remain confident in our ability to execute the necessary actions to have a successful transaction. Activities to ensure the spin company will be operating effectively, efficiently, and independently at inception remain on track. I reiterate what I noted last quarter, in that we expect to complete the spinoff in the first half of 2026, and more specific information about timelines and business matters will be provided later in the year. In the meantime, I do note that as part of the registration process with the SEC, we will first need to complete the 2025 financial statements audit. This will happen by the beginning of March of 2026 and will be quickly followed by a filing of a registration statement. Potential transaction effectiveness then is currently anticipated in May of 2026. That concludes our prepared remarks and we are now ready to take your questions.